In the UK, data on Monday showed that mortgage approvals fell to 64,212 in August from 66,100 in July, lending to non-financial businesses increased by 817 million pounds last month and unsecured lending to consumers rose by 898 million pounds. A GfK report on Tuesday showed that its UK consumer confidence index fell to -1 in September from +1 in August.

Monday, 29 September 2014

The 16th Geneva Report on the World Economy by Luigi Buttiglione, Philip Lane, Lucrezia Reichlin and Vincent Reinhart says that the world economy has not deleveraged.

Contrary to widely held beliefs, the world has not yet begun to delever. Global debt-to-GDP is still growing, breaking new highs...

[G]lobal debt accumulation was:
• Led by developed economies until 2008; but
• Has been led by emerging economies since 2008; the sharp rise in Chinese debt is especially striking.

These emerging markets as a group are an important source of concern in terms of future debt trajectories. China and the so-called ‘fragile eight’ could find themselves in the unwanted role of ‘host’ to the next phase of the global leverage crisis.

The authors further note that the world is seeing low growth and inflation rates. Therefore, they recommend caution on interest rate rises, adding that the European Central Bank in particular “should catch up with the other major central banks in an aggressive policy of quantitative easing”.

Beyond monetary policy, the authors also address the fiscal challenges, the scope for macro-prudential policies, the restructuring of private-sector debt and sovereign debt, and enhanced international policy co-operation in addressing excessive global leverage.

Stocks were boosted by revised data on US GDP on Friday, which showed that the economy grew at a 4.6 percent annualised rate in the second quarter, faster than the previous estimate of 4.2 percent. Corporate profits before tax rose 8.4 percent last quarter, the most since the third quarter of 2010.

Early on Friday, Japan had reported that its consumer price inflation excluding fresh food slowed to 3.1 percent in August from 3.3 percent in July. Excluding the impact of the sales tax increase in April, the rise in core consumer prices was 1.1 percent, well below the Bank of Japan's 2.0 percent inflation target for next year.

Driving the fluctuation were orders for transport equipment. Orders for civilian aircraft fell 74.3 percent in August after jumping 315.6 percent the previous month while orders for automobiles fell 6.4 percent last month after rising 10.0 percent a month earlier.

Also on Thursday, Markit reported that its flash US services PMI showed a fall to 58.5 in September from 59.5 in August. That pulled the composite PMI down to 58.8 in September from 59.7 in August.

Meanwhile, in the euro area, the European Central Bank reported that M3 money supply rose 2.0 percent in August from a year earlier, up from 1.8 percent in July. Loans to the private sector fell 1.5 percent, albeit better than the 1.6 percent fall in July.

Monday, 22 September 2014

“We are determined to lift growth, and countries are willing to use all our macroeconomic levers – monetary, fiscal and structural policies – to meet this challenge,” said Australian Treasurer Joe Hockey, who hosted the event.

However, it was also mindful of the risk arising from monetary stimulus, according to a Bloomberg report.

“We are mindful of the potential for a build-up of excessive risk in financial markets, particularly in an environment of low interest rates and low asset price volatility,” the meeting communique said.

The following are some pertinent statistics cited by Bloomberg:

The Standard & Poor’s 500 Index is in the midst of its longest streak of quarterly gains since 1998, rising last week to a record.

The Chicago Board Options Exchange Volatility Index ended last week at 12.11, 36 percent below its average of the past five years.

The extra return investors demand to hold corporate bonds instead of sovereign securities is at 109 basis points, near the seven-year low of 105 reached in June, according to a Bank of America Merrill Lynch Global Corporate Index.

Saturday, 20 September 2014

Markets were mixed on Friday. The STOXX Europe 600 Index rose 0.2 percent but the S&P 500 fell less than 0.1 percent from its record high closing on Thursday as the US Dollar Index rose for a 10th straight week, the longest since at least March 1967.

Notwithstanding the decline in US stocks on Friday, the US economy is likely to continue to grow in the next few months. A report on Friday showed that the Conference Board's US leading economic index rose 0.2 percent in August after having risen 1.1 percent in July.

Japan's economy also appears likely to maintain growth. Another report on Friday showed that Japan's leading index rose to 105.4 in July -- down from an initial estimate of 106.5 -- from 104.7 in June. The coincident index was unrevised at 109.9, up from 109.3 in June.

Friday, 19 September 2014

Stocks rose on Thursday. The S&P 500 gained 0.5 percent to hit a new record high. The STOXX Europe 600 rose 1.0 percent.

US stocks rose despite a report on Thursday showing that housing starts fell 14.4 percent in August. The decline came after starts had hit a 1.12-million unit rate in July, the highest since November 2007.

Building permits fell 5.6 percent in August.

China's housing market is also looking weak. A report on Thursday showed that average new home prices across China fell 1.1 percent in August, with prices falling in 68 of the 70 major cities monitored, up from 64 cities in July.

In Japan, a report on Thursday showed that exports fell 1.3 percent in August from a year ago. Imports fell 1.5 percent.

Meanwhile, though, there were positive data on the UK economy. A report on Thursday showed that UK retail sales rose 0.4 percent in August, driven by strong sales of furniture and a rush to buy high-powered vacuum cleaners ahead of a European Union ban.

Thursday, 18 September 2014

After the Fed's monetary policy meeting on Wednesday, Chair Janet Yellen told a press conference that US unemployment remains too high and inflation too low.

While Fed officials raised their median estimate for the benchmark federal funds rate to 1.375 percent at the end of 2015 compared with a June forecast of 1.125 percent, Yellen told the press conference: “Even after employment and inflation are near mandate-consistent levels, economic conditions may for some time warrant keeping the target federal funds rate below levels the committee views as normal in the longer run.”

And while the Fed decided to cut monthly bond buying by $10 billion to $15 billion at the latest meeting, Yellen said it could take to the “end of the decade” to reduce the Fed’s holdings “to the lowest levels consistent with the efficient and effective implementation of policy.”

Yellen's view of inflation was supported by data on Wednesday, which showed that consumer prices fell 0.2 percent in August, although the housing market continues to recover, with the National Association of Home Builders/Wells Fargo housing market index rising to 59 in September from 55 in August.

Data from the euro area on Wednesday showed that inflation there was also low. Consumer prices there rose 0.4 percent in August from a year ago, the same rate as in July but slightly higher than the initial estimate of 0.3 percent.

Meanwhile, the employment picture in the UK improved in July. A report on Wednesday showed that the unemployment rate fell to 6.2 percent in the May-July period, the lowest level since the September-November 2008 period, while average weekly earnings rose 0.6 percent from the previous year.

A recent Bloomberg report says that an emerging-market bond fever is worrying the BIS, whose report noted that yields on developing nations’ 10-year local-currency bonds fell to about 5.8 percent at the end of August, about 0.5 percentage point less than February levels.

The flow of money into emerging-market assets could be potentially destabilising.

Investors tend to move in herds in these markets, “accentuating both booms and busts,” BIS analysts Ken Miyajima and Ilhyock Shim wrote in a report this month. While foreign investors may boost growth now, “this comes at a price,” they wrote.

But there is potential for instability in the US as well.

Sober Look noted last week that “US middle market leveraged buyout (LBO) transactions are becoming increasingly frothy”, with data showing that “risk-return fundamentals in the space are worse than they were in 2007”.

The eurozone economy is now expected to grow 0.8 percent this year, down from 1.2 percent in May, while the US economy is expected to grow 2.1 percent instead of 2.6 percent.

The OECD expects these economies to accelerate in 2015, with the eurozone economy expanding 1.1 percent and the US economy expanding 3.1 percent.

Japan's economy is expected to grow 0.9 percent this year and 1.1 percent in 2015, while China's economy is forecast to grow 7.4 percent and 7.3 percent.

Also on Monday, data from the Federal Reserve showed that US industrial production fell 0.1 percent in August, with manufacturing output declining 0.4 percent as car production fell 7.6 percent.

Over the weekend, China had reported that industrial production rose 6.9 percent in August from the previous year, sharply lower than the 9.0 percent growth in July and the weakest growth since December 2008.

Other data released over the weekend showed that Chinese retail sales rose 11.9 percent in August from the previous year, down from 12.2 percent in July, while fixed asset investment rose 16.5 percent in the first eight months of this year from the corresponding period last year, down from the 17.0 percent increase for the first seven months.

In the review, the BIS noted that financial market volatility spiked higher in August on the back of geopolitical concerns and worries over economic growth but quickly returned to “exceptional lows” across most asset classes.

“By fostering risk-taking and the search for yield, accommodative monetary policies thus continued to contribute to an environment of elevated asset price valuations and exceptionally subdued volatility,” the BIS said.

After last week's moves, the S&P 500 now trades at 16.6 times estimated earnings, the STOXX Europe 600 at 15.5 and the MSCI Asia Pacific at 13.7.

While stock market valuations may not look unduly stretched at the moment, a rise in interest rates could still put additional pressure on stock prices.

The Federal Reserve meets to decide on monetary policy on 16-17 September. While it will almost certainly not increase interest rates at this meeting, the probability that the Federal Reserve will tighten monetary policy soon was raised just a little last week after some positive data for the United States economy.

A report on Friday showed that US retail sales rose 0.6 percent in August while another report showed that the Thomson Reuters/University of Michigan consumer sentiment index rose to 84.6 in September from 82.5 in August.

The euro area also saw positive economic data last week. Reports on Friday showed that industrial production rose 1.0 percent in July while employment rose 0.2 percent in the second quarter.

Data from the two major economies in Asia last week were mixed though.

In China, reports last week showed that bank lending nearly doubled in August from the previous month but imports fell and export growth slowed while inflation eased to 2.0 percent in August from 2.3 percent in July.

Japan last week revised its second quarter GDP report to show a larger contraction of 1.8 percent compared to the initial estimate of a 1.7 percent contraction. Adding to the negatives, the consumer confidence index fell to 41.2 in August from 41.5 in July while the diffusion indices from the economy watchers survey showed deterioration in service sector sentiment last month as well.

More positively for Japan, other reports last week showed that core machinery orders rose 3.5 percent in July and the business outlook survey showed large improvements in business leaders' assessment of the economy in the third quarter compared to the previous quarter.

And US consumer spending could improve further after another report on Friday showed that the preliminary September reading of the Thomson Reuters/University of Michigan consumer sentiment index indicated a rise to 84.6 from 82.5 in August.

Thursday, 11 September 2014

A report on Wednesday showed that US wholesale inventories edged up 0.1 percent in July, the smallest rise since July of last year, after a 0.2 percent gain in June. This was well below the 0.5 percent increase expected by economists.

Some economists lowered their GDP growth forecasts for the third quarter following the report. Barclays cut its third-quarter growth forecast by 0.2 percentage point to a 2.5 percent annual rate. Action Economics lowered its forecast to a 2.8 percent rate from 3.0 percent.

Data from Japan, however, have been more positive.

A report from Japan on Wednesday showed that core machinery orders rose 3.5 percent in July. Orders had jumped 8.8 percent in June following a 19.5 percent plunge in May.

In the UK, a report on Tuesday showed that industrial production rose 0.5 percent in July, the most in six months, but another report showed that the goods trade deficit rose to 10.186 billion pounds in July.

In contrast, Monday had seen both China and Germany report record trade surpluses.

Monday, 8 September 2014

A report on Monday showed that Japan's economy shrank 1.8 percent in the second quarter, more than the initially-estimated 1.7 percent.

The revision was largely due to a bigger than expected fall in capital expenditure and a deeper decline in consumer spending.

Another report on Monday showed that the current account returned to surplus in July, coming in at 416.7 billion yen compared to a deficit of 399.1 billion yen in June.

However, a third report showed that service sector sentiment worsened in August, with the economy watchers survey's current conditions index falling to 47.4 in August from 51.3 in July. The future conditions index fell to 50.4 last month from 51.5 in July.

Friday, 5 September 2014

All three of the ECB's main interest rates were lowered by 10 basis points, with the benchmark rate being cut to 0.05 percent.

In addition, ECB President Mario Draghi announced at a press conference after the meeting that the central bank “will purchase a broad portfolio of simple and transparent securities” as it sees “the risks around the economic outlook on the downside”.

The ECB decision to inject additional monetary stimulus comes even as a report on Thursday showed that the euro area's largest economy, Germany, saw factory orders rebound 4.6 percent in July after having fallen 2.7 percent in June.

Two other major central bank monetary policy meetings on Thursday ended relatively uneventfully. Both the Bank of Japan and the Bank of England left their monetary policies unchanged after their meetings.

There was no central bank meeting in the US on Thursday but generally positive economic reports that day suggest that the Federal Reserve is more likely to remove monetary stimulus than add to it.

A report from Markit showed that its US services PMI dipped to 59.5 in August from 60.8 in July. This pulled the composite index down to 59.7 last month from 60.6 the previous month.

However, both indices remain well above the 50 mark that signals expansion in activity.

Thursday, 4 September 2014

In its latest Beige Book, the Federal Reserve reported that US economic activity continued to expand in recent weeks, with manufacturing expanding across a broad base of sectors and auto sales hitting “high levels”.

That report was corroborated by other data on Wednesday. New orders for manufactured goods jumped 10.5 percent in July, a record monthly gain, while auto sales rose to an annual rate of 17.53 million units in August, the highest since January 2006.

In contrast, data on Wednesday showed that growth in the euro area slowed in August. Markit's composite PMI fell to an eight-month low of 52.5 last month from 53.8 in July as the services PMI fell to 53.1 from 54.2. In addition, eurozone retail sales fell 0.4 percent in July.

However, in China, services activity rebounded in August. The HSBC/Markit services PMI jumped to 54.1 last month 50.0 in July while the official non-manufacturing PMI rose to 54.4 from 54.2 in July.

Monday, 1 September 2014

The MSCI All-Country World Index jumped 2.0 percent last month, the Standard & Poor’s 500 Index surged 3.8 percent to a record high and the STOXX Europe 600 Index rose 1.8 percent.

Bonds also rose. The United States 10-year note yield fell 21 basis points in August to 2.34 percent as yields in Europe collapsed to record lows. The German 10-year bund yield reached 0.866 percent on 28 August while the French 10-year government-bond yield fell to 1.217 percent.

The US 10-year note yield exceeded those of its Group of Seven counterparts by 79 basis points on 26 August, the most since June 2007, according to Bloomberg.

Jim Hamilton at Econbrowser looked at the longer term trend in bond yields and noted that, apart from a rebound in the spring of 2013, the general trend since the end of the Great Recession has been down.

Once you correct for pricing of risk, it looks like investors have been anticipating a negative real rate well into the future ever since the end of the recession. Expectations lifted in the first half of 2013, but have been falling sharply this year.

What could produce such a pattern? It’s hard to attribute it to changing perceptions about the Fed, which should surely matter more for the next 5 years than they would for 5 to 10 years from now. More confidence that the U.S. government will be able to keep debt from growing relative to GDP over the next decade may have played a role.

Another possibility is that more people are starting to take seriously the suggestion that we’re on a path now of secular stagnation with weak economic growth and poor investment opportunities over the next decade. But that’s hard to reconcile with the stock market, which climbed impressively this year.

Or then again, maybe the market has simply overpriced both stocks and long-term bonds.

While there are a fair number of warning signs now that the free money policies of the world’s central banks have given us another stock bubble, they’re outnumbered by the flashing red lights we see over in the bonds market...

In a normal, non-bubble, environment, we’d expect that more supply coupled with lower credit-worthiness would lead to higher yields. But in the midst of a bubble, we often see the reverse. And today, we are.

Take Italian debt, for example. Italy’s gross domestic product is actually smaller than it was in 2008, and it has issued bonds at a furious pace to keep its economy afloat. As a result, it now sports a frighteningly high debt-to-GDP ratio of over 135%. And yet the yield on its 10-year bond has sunk from 7.1% in 2012 to just 2.4% today.

Martenson also sees rising issuance in corporate bonds, falling credit quality, fewer creditor protections, diminishing yields, insider selling, and evaporating liquidity, and thinks that they add up to a bubble, one that is “larger than any we’ve yet lived through”.